An important part of a sound financial plan, life insurance provides a valuable benefit to your beneficiaries. In the event of your passing, life insurance provides the death benefit directly to your beneficiaries who can use the death benefit to replace some of the income you would have earned or to help pay off debts or other expenses.

Life insurance can be used as a safe guard for the unexpected and can help you prevent a financial crisis in the unplanned event of your passing. The following are a few examples of how the death benefit can be used:

Make up for lost income

Fund your child's education

Paying off household debt

Paying for your funeral and other related expenses

Used in estate planning for tax purposes

The two types of life insurance are Term Insurance and Permanent Insurance. The one that's right for you depends on many factors, including your budget, the amount of coverage you need, and the length of time you'd like the coverage to last.

If you want life insurance for a limited time – long enough to meet your anticipated responsibilities to those who depend on you, but not longer – Term Life Insurance may be right for you.

If you value added security, flexibility, cash value and lifetime coverage, some form of Permanent Life Insurance may be right for you. The most common types of Permanent Life Insurance are Universal Life Insurance and Whole Life Insurance.

Term Life Insurance

It’s generally the most affordable type of life insurance and delivers a fixed amount of death benefit coverage for a specified number of years (which is known as the “term”). Term Life Insurance is ideal for covering temporary needs like paying off a mortgage or other debts in the event of an untimely death.

Term Life insurance can be the best option if your budget will not allow you to purchase more expensive permanent insurance, yet you need to cover certain debts and expenses in case of your untimely death. Many term policies have the option of “conversion” which allows you to convert the term policy into a permanent policy at a later date.

Term Life Insurance Basics

Provides coverage for a specified period

Easy to understand

Affordable way to get maximum coverage

Becomes expensive after the specified period

You build no equity

Permanent Life Insurance

While Term Life can be described as a base model of life insurance, Permanent Life insurance provides flexibility along with coverage for longer-range goals. In addition to covering current debt and expense or replacement of income Permanent Life Insurance is a great tool to help provide coverage for college funding, supplemental retirement income, charitable giving and leaving an inheritance for your heirs.

Also, Permanent Life insurance offers the opportunity to build tax-deferred cash value that you can access for future use.

Permanent Life Insurance Basics

Protection for your whole life, as long as sufficient premiums are paid

Can build equity in the form of a cash value

Offers flexibility and many options to choose from

Initially higher premiums than Term, but generally more cost-effective in the long run

The two most common types of Permanent Life Insurance are Whole Life Insurance and Universal Life Insurance.

Whole Life Insurance

Whole Life Insurance is the simplest form of permanent life insurance. It features lifelong protection with guaranteed premiums, death benefit, and cash value.

You should consider Whole Life Insurance if you want:

Guaranteed Death Benefit

Fixed Premiums

Cash Value Guaranteed to grow each year

Dividends to be used to increase policy value

Some aspects to consider when thinking about Whole Life Insurance:

Premiums are initially more costly than Term Life, but are guaranteed not to increase

Dividends are not guaranteed

Loans and withdrawals can reduce the death benefit payout

Universal Life Insurance

Universal Life insurance has more features than Term Life that allows for great flexibility than Whole Life Insurance. For example, Universal Life Insurance has features like flexible premium payments and allows you to change death benefit.

You should consider Universal Life Insurance if you want:

Protection that can last a lifetime

The flexibility to choose between two structure of policy:

Protection plus cash accumulation

Affordable guaranteed protection

Some aspects to consider when thinking about Universal Life Insurance:

Cash value growth is based on periodically-declared fixed interest rates. If the interest rates fall, your cash value could suffer, and higher premiums may be needed

Variable Life Insurance

Variable Life Insurance combines the protection and tax efficiencies of life insurance with the investment potential of market gains. The life insurance aspect provides death benefit coverage, while the variable aspect allows the policy’s cash value the opportunity to increase as it participates in investment sub-accounts. A sub-account acts similar to a mutual fund, except it's only available within a variable life insurance and annuity policy

It is important to note that because Variable Life Insurance is subject to market returns and investment risk your principal is not guaranteed.

Beneficiary Designation

Beneficiary Type

Sample Wording

One beneficiary

Jane Smith, spouse

Two beneficiaries

John Doe, brother and Mary Doe, sister, equally or to the survivor

Three or more beneficiaries

John Doe, father, Mary Doe, mother and Jane Doe, sister, equally or to the survivors or survivor

Per capita(1)

To all children of this marriage and to the survivors of a deceased child, per capita

Per stirpes(2)

To all children of this marriage and to the survivors of a deceased child, per stirpes

Unnamed children born of the insured

Lawful children of the insured, equally or to the survivors or survivor

Unnamed children born of a particular marriage

Children born of the marriage of the insured and Mary Doe, wife, equally or to the survivors or survivor

Unnamed children, including legally adopted children

Children born of the marriage of, or legally adopted by the insured and Mary Doe, wife, equally or to the survivors or survivor

Joint tenants with rights of survivorship(3)

John Doe and Jane Smith as joint tenants with right of survivorship

Irrevocable beneficiary(4)

John Doe, Irrevocable Beneficiary

Accidental death benefit to someone other than named beneficiary

Proceeds of the Accidental Death Benefit, if any, shall be paid to John Doe, son, if living; otherwise Mary Smith and Nancy White, sisters of the insured, equally or to the survivor. Any balance of the proceeds of the policy shall be paid to John Jones, partner of the insured

AKAs (also known as)

Veterans of Foreign Wars, a.k.a. VFW

Bank loans(5)

First Savings Bank, as its interests may appear under loan #9999999, dated 01/01/00, with balance, if any, to Jane Doe

Buy-Sell agreement

Trustee of the Buy-Sell Agreement between John Jones and Jane Smith under the agreement dated 01/01/00

Common disaster clause(6)

Jane Doe, wife, if she survives the insured for a period of __days; otherwise, children born of the marriage of the insured and said wife, or the survivors equally, or the survivor

Individual creditor

John Doe, creditor, under a line of credit (or revolving loan), balance, if any, to Jane Smith

Estate of the insured

Estate of the insured

Split dollar beneficiary(7)

The greater of the sum of the premiums paid or the cash accumulation account to ABC Corporation; balance to Jane Doe, wife of the insured

Uniform Gifts/Transfers to Minors (UGMA/UTMA)(8)

John Doe as Custodian for Jane Doe, minor, under the (state) Uniform Gift to Minors Act -or- John Doe as Custodian for Jane Doe, minor under the (state) Uniform Transfers to Minors Act

Trusts(9)

Trustee of the John Doe Trust Agreement dated 01/01 /OO -or- Trustee of the John Doe Irrevocable Trust under Trust Agreement dated 01/01/00 -or- John Doe for the benefit of Jane Doe and John Doe (informal trust arrangement) -or-Trustee of the John Doe Living Trust under Trust Agreement dated 01/01/00

If one of the children dies but has children of his own, that person's share would be divided among his children

If one of the children dies but has children of his own, that person's share would be divided among his children

On the death of one joint tenant, the tenant's share of the property goes automatically to the survivors or survivor

The beneficiary's interest in the policy cannot be changed or reduced without his or her consent

At death, the bank will receive payment for the outstanding balance, with the rest going to the named beneficiary

Applies when two people die under conditions where it is Impossible to determine which one died first. This clause can be for any number of days under six months. Most companies will try to discourage longer periods

Always according to the actual split

Under either of these options there may be restrictions as to who can be named owner or beneficiary

The trust should be signed prior to the date on the application and the policy issue date in order to avoid inclusion of the proceeds in the estate of the insured. Consult the issuing company for specific handling directions